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Vertical Pricing and Parallel Imports

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  • Yongmin Chen
  • Keith Maskus

Abstract

We generalize an earlier model of international vertical pricing to explain key features of parallel imports, or unauthorized trade in legitimate goods. When a manufacturer (or trademark owner) sells its product through an independent agent in one country, the agent may find it profitable to engage in parallel trade, selling the product to another country without the authorization of the manufacturer. Although parallel imports can be deterred when the manufacturer's wholesale price is sufficiently high, there is a trade-off between improving vertical pricing efficiency and reducing parallel imports. In equilibrium, parallel imports can come from a country with higher retail prices, which is consistent with some factual data. While countries have varying interests in such a policy, restricting parallel imports tends to increase global welfare when trade cost is high, but may reduce welfare when trade cost is low. This finding suggests that open parallel trading regimes may be most appropriate within regional trade agreements.

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File URL: http://www.tandfonline.com/doi/abs/10.1080/0963819042000333225
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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal The Journal of International Trade & Economic Development.

Volume (Year): 14 (2005)
Issue (Month): 1 ()
Pages: 1-18

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Handle: RePEc:taf:jitecd:v:14:y:2005:i:1:p:1-18

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Web page: http://www.tandfonline.com/RJTE20

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Web: http://www.tandfonline.com/pricing/journal/RJTE20

Related research

Keywords: Parallel imports; vertical price formation; intellectual property rights;

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Citations

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Cited by:
  1. Mattias Ganslandt & Keith E. Maskus, 2007. "Wholesale Price Discrimination and Parallel Imports," CESifo Working Paper Series 1951, CESifo Group Munich.
  2. Granlund, David & Yesim Köksal, Miyase, 2012. "EU Enlargement, Parallel Trade and Price Competition in Pharmaceuticals - What’s to Blame? Derogation or Perception?," HUI Working Papers 59, HUI Research.
  3. Joan Costa-i-Font & Panos Kanavos, 2007. "Medicines in parallel trade in the European Union: a gravity specification," LSE Research Online Documents on Economics 28787, London School of Economics and Political Science, LSE Library.
  4. Brekke, Kurt R. & Holmås, Tor Helge & Straume, Odd Rune, 2014. "Price Regulation and Parallel Imports of Pharmaceuticals," Discussion Paper Series in Economics 1/2014, Department of Economics, Norwegian School of Economics.
  5. Granlund, David & Yesim Köksal, Miyase, 2011. "Parallel Imports and Mandatory Substitution Reform: A kick or a muff for price competition in pharmaceuticals," Working Papers in Economics 496, University of Gothenburg, Department of Economics.
  6. Granlund, David & Yesim Köksal, Miyase, 2011. "EU Enlargement, Parallel Trade and Price Competition in Pharmaceuticals - What’s to Blame? Derogation or Perception?," UmeÃ¥ Economic Studies 831, Umeå University, Department of Economics.
  7. Raimondos-Møller, Pascalis & Schmitt, Nicolas, 2010. "Commodity taxation and parallel imports," Journal of Public Economics, Elsevier, vol. 94(1-2), pages 153-162, February.
  8. Hsiu-Li Chen, 2009. "Gray Marketing: Does It Hurt the Manufacturers?," Atlantic Economic Journal, International Atlantic Economic Society, vol. 37(1), pages 23-35, March.
  9. Shen Guo & Bin Hu & Hai Zhong, 2013. "Impact of parallel trade on pharmaceutical firm’s profits: rise or fall?," The European Journal of Health Economics, Springer, vol. 14(2), pages 345-355, April.
  10. Granlund, David & Köksal, Miyase Yesim, 2011. "Parallel Imports and Mandatory Substitution Reform - A Kick or A Muff for Price Competition in Pharmaceuticals?," HUI Working Papers 49, HUI Research.
  11. Ying Xiao & Udatta Palekar & Yunchuan Liu, 2011. "Shades of gray—the impact of gray markets on authorized distribution channels," Quantitative Marketing and Economics, Springer, vol. 9(2), pages 155-178, June.
  12. Ganslandt, Mattias & Maskus, Keith E., 2005. "Vertical Distribution, Parallel Trade, and Price Divergence in Integrated Markets," Working Paper Series 639, Research Institute of Industrial Economics.
  13. Granlund, David & Yesim Köksal, Miyase, 2011. "EU Enlargement, Parallel Trade and Price Competition in Pharmaceuticals. What's blame? Derogation or perception?," Working Papers in Economics 499, University of Gothenburg, Department of Economics.

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